Inflation is over 9.1% year over year and people are hurting. The truth is, there are many ways the average person can hedge against inflation and shield their damage from the hurt of rising prices. The best way to do this in my opinion is to invest in appreciating and cash flowing assets. This includes but is not limited to real estate and stocks. Precious metals and cryptocurrency are also great options to choose from in times like these or any time for that matter. To explain the reason why investing smartly works so well in times of high inflation, picture the following image in your head. You’re in the ocean and the tide is rising. You have no life support, and sooner or later you will drown. Luckily, a raft came floating by and you were able to jump on it. Now you get to ride the rising tide rather than letting it suck you in. In this story, the rising tide is the inflation, and you were drowning in it as it rose higher and higher. The raft saved your life and the life of your money by being able to stay above the rising levels of inflation no matter how high it got. Now that I have painted that image in your head, let’s talk about exactly how you can get in that raft!
Appreciation and cash flow
Proven assets such as real estate and the stock market have the unique characteristic of historically appreciating. I’m sure you’ve heard quotes from world renown investors such as Warren Buffet saying, “Buy the dip!” This strategy of putting your money into assets is not new, but for whatever reason, it is not as utilized as it should be. Even if the value of your asset decreases for a certain period of time, if the asset you control is a strong one, you will prevail. Another great perk of these types of assets is that not only do they appreciate over the long haul, but they also produce what is known as cash flow. Cash flow is the golden ticket that allows you to get paid for owning your asset while you wait for it to appreciate and to make gains from any sort of loan paydown. In real estate this cash flow comes in the form of rent, and in stocks it comes from what are called dividends. In real estate, cash flow is very simple. It is the money that is left over monthly from rent after all expenses are paid including the mortgage if there is one. Most of the time for single family houses, this will only be a few hundred dollars. However, a few of these single family properties could increase your monthly income significantly if you keep adding smart investments to your portfolio. This is by far my favorite avenue of investing as I am currently using real estate the most to build my portfolio. Even in times where interest rates are increasing and we are beginning to see more foreclosures in the market, investing in real estate is always a smart idea as long as you can find a way to cash flow. If using the traditional route of investing isn’t in the cards for you for whatever reason, check out our last blog post all about creative ways to invest. There are many different strategies you can use to get into real estate for little or no money, so check out our previous post here!
In the stock market, choosing a solid investment is key to future success based on company fundamentals and not just market hype. So many people lose their shirts by investing everything they have into what is trending only to lose it all because they knew nothing about the company and the value was inflated. The best way to combat this in my opinion and still get all the benefits of owning stock is by investing in index funds. Index funds are run by algorithms and they contain specific sects of the stock market. For example, the ticker SPY is an index fund that contains the S & P 500. There are so many different tickers for different types of investment vehicles. You can find the ones that are right for you within minutes. Besides balancing my portfolio, I view index fund investing as more of a set it and forget it type of investment. A lot of these index funds and stocks in general pay you for owning the stock in dividends. Like cash flow from rentals, dividends are “payment while you wait”. While waiting for appreciation and long term returns, dividends reward you for taking the risk of buying stock. They can be distributed to stock owners monthly, quarterly, semi-annually, annually, or however they want to do it essentially. You will be able to see their payment and their distribution basis before buying the stock to help you make the best decision possible. Dividends are based on company profit and how much stock you own, so payments will vary drastically between people depending on their stake. Beware though, not all stocks offer dividends, and that isn’t necessarily a bad thing! It may mean the company is investing their profits more so into their growth. The biggest thing to understand when buying stock is the fundamental strength of the investment is the most important aspect above all else. Dividends are just an added bonus to a strong investment.
Investing outpaces inflation
The goal of investing is to outpace inflation. When you keep cash heavy positions during periods of high inflation that you don’t intend on investing, you are decreasing the purchasing power of your money. In layman’s terms, this means the money you have in your bank account is decreasing in value and is worth less than it once was. Although inflation in some capacity is part of a healthy economy, not at the scale we are seeing today. The best way to protect yourself and your money is to invest smartly into proven asset classes and get paid while you wait!